Ho Hum. EU officials have announced the results of more Stress-Free bank tests in Europe. 20 banks were expected to fail, only 8 did.

Please consider 8 Banks Fail EU ‘Stress Tests’

Eight banks flunked the European Union’s “stress tests,” with a combined shortfall of €2.5 billion ($3.54 billion) in capital under a simulated worst-case economic scenario, the European Banking Authority said.

The EU regulator said Friday that another 16 banks narrowly passed the tests, which examined the abilities of 90 top lenders across Europe to endure a deteriorating economy and strained financial system.

By awarding a relatively clean bill of health to the vast majority of Europe’s banking industry, the tests are likely to be greeted with skepticism. Analysts and investors were bracing for as many as 20 banks to fail and to need to raise tens of billions of euros of new capital.

Last year’s tests, widely discredited for being overly lax and inconsistently enforced, saw seven lenders fail, with a combined capital deficit of €3.5 billion.

Spain, whose economy and banking system are reeling from a collapsed real-estate market, is home to the largest number of failures, with five banks dipping beneath the 5% threshold, the EBA said. Another seven Spanish lenders barely passed, with capital ratios between 5% and 6%.

Two Greek banks and one Austrian bank also failed the tests, the EBA said. In addition to Spain, the countries with banks that nearly failed are Cyprus (one bank), Germany (two), Greece (two), Italy (one), Portugal (two) and Slovenia (one).

In Ireland, which had to accept an international rescue last fall after its banking system imploded, all three of the tested banks easily passed the tests.

“The European bank stress tests this year have done a poor job of building confidence,” said Heinrich Haasis, president of the German Savings Banks Association, in a statement Friday. “The task now is to ensure that no additional uncertainty affects the markets.”

Did the stress tests include a Greek default? What about Irish, Portuguese, or Spanish defaults. What exactly was stressed?

The answer to those questions is no.

Here is the Executive Stress Test Summary

The stress test exercise. The 2011 EBA’s EU wide stress test had the objective of assessing the resilience of a large sample of banks in the EU1 against an adverse but plausible scenario. The scenario assesses banks against a deterioration from the baseline forecast in the main macroeconomic variables such as GDP, unemployment and house prices – for instance, GDP would fall 4 percentage points from the baseline. The scenario includes a sovereign stress, with haircuts applied to sovereign and bank exposures in the trading book and increased provisions for these exposures in the banking book. Changes in interest rates and sovereign spreads also affect the cost of funding for banks in the stress. The stress testing methodology, which was published by the EBA on March 18th, 20112, entails a static balance-sheet assumption, and also does not allow the banks to take actions to react to shock. The resilience of the banks is assessed against a benchmark defined with reference to capital of the highest quality — Core Tier 1 (CT1) — set at 5% of risk weighted assets (RWA).

It is interesting to see “Stress Tests” in quotes. It appears the article does not believe there was much stress to the tests and I don’t either.

Mike “Mish” Shedlock
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